Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

What Is My Marginal Tax Rate?

The marginal tax rate doesn't reflect your overall tax rate, which might be a lot less than you think.

When it comes to tax rates, many people get confused by the difference between their tax bracket and the tax rate they actually pay on their income. The marginal tax rate relates to tax brackets and is defined in a variety of ways, while your effective rate is what you really pay -- and is usually more important. Let's dive into what marginal (and effective) tax rates are, so that you can determine yours.

Defining termsIf you do a fair amount of financial or tax-related reading, you'll probably run across a variety of definitions for "marginal tax rate." Even within IRS publications, there doesn't seem to be a single precise definition. A 2004 article explains, "Measures of marginal tax rates, on the other hand, focus on determining the tax rate imposed on the last (or next) dollar of income received by a taxpayer." A 2014 article notes, "A return's marginal tax rate is the highest statutory tax rate bracket applicable to that tax return." All that may seem confusing, but the definitions are really not that far off from each other.

Basically, marginal tax rates refer to the tax rates in the schedules of income tax rates that are published each year. Let's review the 2015 brackets and how they work, and then the definition of the marginal tax rate and the effective tax rate will be clear.

The 2015 tax bracketsHere are the tax brackets for 2015:

2015 Tax Brackets

Single Filers

Married Filing Jointly or Qualifying Widow/Widower

Married Filing Separately

Head of Household

10%

On taxable income up to $9,225

On taxable income up to $18,450

On taxable income up to $9,225

On taxable income up to $13,150

15%

On taxable income from $9,226 to $37,450

On taxable income from$18,451 to $74,900

On taxable income from $9,226 to $37,450

On taxable income from $13,151 to $50,200

25%

On taxable income from $37,451 to $90,750

On taxable income from $74,901 to $151,200

On taxable income from $37,451 to $75,600

On taxable income from $50,201 to $129,600

28%

On taxable income from $90,751 to $189,300

On taxable income from $151,201 to $230,450

On taxable income from $75,601 to $115,225

On taxable income from $129,601 to $209,850

33%

On taxable income from $189,301 to $411,500

On taxable income from $230,451 to $411,500

On taxable income from $115,226 to $205,750

On taxable income from $209,851 to $411,500

35%

On taxable income from $411,501 to $413,200

On taxable income from $411,501 to $464,850

On taxable income from $205,751 to $232,425

On taxable income from $411,501 to $439,000

39.6%

On taxable income of $413,201 or more

On taxable income of $464,851 or more

On taxable income of $232,426 or more

On taxable income of $439,001 or more

You'll notice that the tax rate gets higher as incomes rise. That's because this is a progressive tax schedule, taking a bigger cut from those earning more. (Still, everyone is taxed the same on their first $25,000 or $75,000 or $313,000 of earnings.)

Don't confuse your marginal tax rate with your effective tax rate.

Marginal rates, effective rates, and misunderstandingsMany people mistakenly assume that if they're in the 25% tax bracket, all their income will be taxed at 25%. That's far from the case. If you're a single filer, with $50,000 in taxable income, you are in the 25% tax bracket. But you're also in the 10% and 15% ones. The preceding tax brackets show that the first $9,225 of your income is taxed at just 10% and the next $28,225 is taxed at 15%. It's only the income above $37,451 that's taxed at 25%. In this case, your marginal tax rate would be 25%. It's the rate at which your next dollar (or your last dollar, depending on the definition being used) is taxed.

So if you're actually paying several different tax rates on different sums, what's your overall tax rate? Well, your total taxes calculated from the brackets above amount to $8,293.75. If you divide that by your taxable income of $50,000, you'll get 17%. That's your effective tax rate -- and it's probably the rate that should matter most to you, because it reflects what you actually paid. Your marginal rate just reflects the highest rate at which you paid, the rate at which your last dollar and next dollar are taxed.

If you hear someone grumbling about being in the 39.6% tax bracket, know that it's probably only his or her income above $413,200 that's being taxed at that rate.

At TaxAct.com, you can enter various taxable incomes and see which 2014 tax brackets apply and what their overall effective tax rate is. (Presumably, the site will be updated with 2015 numbers later in the year.) For example, someone earning $200,000 will be in the 33% bracket, but his or her effective tax rate will be 24.9%.

So the next time you think about your marginal tax rate, remember that it's different from your effective tax rate, and you might be more interested in the effective rate.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian